Moody’s raises government bond grade, lira gains strength

Moody’s Investors Service on Wednesday raised Turkey’s government bond »»

Moody’s Investors Service on Wednesday raised Turkey’s government bond ratings by one notch to just below investment grade and maintained its positive outlook on the country, signaling that a further upgrade is likely in the mid term.

The country’s rating became Ba1 from an earlier Ba2. The international credit rating agency cited a significant improvement in Turkey’s public finances and the resulting increased shock-absorption capacity of the Justice and Development Party (AK Party) government’s balance sheet. The national currency strengthened against both the dollar and euro with bond yields dropping as a result. The US dollar was trading at nearly TL 1.79, some half a percent lower than Tuesday’s close, and the euro depreciated by 0.4 percent to TL 2.28. The yield on the benchmark government bond fell below 9 percent for the first time in nearly five months.

The move by Moody’s came at a time when the government is angry with Standard & Poor’s (S&P) -- one of the two other major rating agencies -- which lowered its outlook on the country’s sovereign rating, citing “deterioration of its terms of trade.” With its explanation for that decision not finding a receptive audience among financial experts inside and outside Turkey, S&P was heavily criticized by Prime Minister Recep Tayyip Erdoğan for its “political and ideological” approach against Turkey. Erdoğan’s government also floated the idea of ending the country’s contract with the agency.

As nice as it may sound, Moody’s move was not good enough for Economy Minister Zafer Çağlayan. “This upgrade is a step in the right direction but not enough,” he said in a statement, adding: “Turkey’s public debt continued to decrease at a time when there is fire in foreign markets. As of the end of 2011, Turkey had a lower public debt/GDP ratio than 21 of the European Union’s 27 members and a lower budget deficit/GDP ratio than 23 of them. Such a country’s grade must be higher than Ba1.”

Risks

On Wednesday, Moody’s also made mention of policy actions that have the potential to address external imbalances, such as the large current account deficit (CAD), which is the largest credit risk facing the country.

Turkey’s CAD is seen as the country’s main economic weak point in an otherwise booming economy. The CAD stood at 10 percent of GDP in 2011, among the highest in the world, but is expected to decline to 8 percent this year. “Looking ahead, an upgrade to an investment-grade rating will probably be dependent on Turkey becoming more resilient to balance-of-payment shocks, given the already favorable public-finance metrics,” Moody’s said in a statement. The other international rating agency Fitch rates Turkey BB+, just a notch under investment grade, while S&P rates it a rung lower.